Owning a small business offers rewards you just cannot get as an employee. Still, owning a business is not right for everyone. It is certainly not for the faint of heart. There are a lot of potential pitfalls, including the messiness that results when personal and business finances are mixed.
This post discusses how small business owners can protect their personal finances even as they look to run their companies. Suffice it to say that protecting one’s own finances is incredibly important. There is no need to risk family and personal property to be a successful small business owner.
Choose Company Structure Wisely
The first thing to consider is the company structure. Small businesses can be structured as sole proprietorships, limited liability corporations (LLC’s), and partnerships. Each structure has its advantages and disadvantages. Each affects how personal and business finances interact.
Uncle Sam does not recognize a difference between personal and business finances among sole proprietors. For tax purposes, all sole proprietor revenue is personal income. Still, sole proprietors can keep their finances separate – and they should.
Things are different for LLC’s and partnerships. Uncle Sam does recognize them as separate entities, so it is a lot easier to keep business and personal finances separate under both of these structures. Here is the lesson: choose your company structure wisely.
Establish Separate Accounts
It seems obvious that small business owners would establish separate bank accounts for personal and business finances. However, that is not always the case. There are some business owners who use a single account and then rely on the accounting software to keep things separate. They create separate sub-accounts within the software to keep track.
This sort of arrangement might work well for accounting purposes, but it is not necessarily the best way to approach business finances. Dallas-based BenefitMall explains that the biggest concern here relates to taxes. Not keeping accounts separate could subject a small business owner’s personal finances to the penalty if tax bills are not paid promptly. That leads us to the third point: payroll taxes.
Establish a Separate Payroll Account
Small businesses with employees other than immediate family members must withhold and pay payroll taxes on a regular schedule. Payroll taxes are paid directly from a business’s bank account through electronic transfer.
Not establishing a separate account means payroll taxes are mingled with business revenues. An awful lot of companies get themselves into tax trouble by mingling their funds. They lump everything together only to find out that they do not have enough to cover their tax bills when due.
Along those same lines, it’s not a bad idea to set up a separate account for sales tax as well. Having a third account does require a little bit more effort, but it pays off when it’s time to pay sales taxes. The money is there, thus there’s no need to dip into the general fund to pay the bill.
Be Careful with Business Loans
Finally, small business owners can protect their personal finances by being very careful with business loans. The number one rule of obtaining loans is to never offer a personal guarantee. If a business cannot support borrowing on its own, then perhaps a business loan is not the best way to go.
Owning a business is an exciting and fulfilling way to make a living. But it must be taken seriously, especially where personal and business finances are concerned. As a small business owner, protect yourself by never mixing the two.